Monday, March 10, 2008

And then it hit me like a freight train

(hedge fund run redux)
Talking with a friend in the industry, the words "the banks are screwing the hedge funds" hit home.

Basically, the drawing below in wrong in ONE aspect: "Your lost your collateral". NO! that is the point: they get the collateral for CHEAP. The banks are asking the hedgies for the collateral. The collateral is depressed and this puts more pressure on it. Basically the banks are getting all these assets at fire-sale prices except they are the ones SETTING THE BUILDING ON FIRE. The banks are telling the hedgies to hand over the goods! THIS IS A TRAIN ROBBERY, FAR-WEST STYLE!

So let me get this straight: the FEDs are backing the banks so they get ALL the liquidity help they need. And they turn around and screw with the hedgies (and their shareholders/investors) knowing no one is going to shed a tear. Where the FED ease the pressure (costing everyone) the banks put the pressure on (costing everyone)... who is watching the banks? The legislation that can happen should stop the "mark to madness" hysterics going on as it gives the banks a systemic trigger to go out and do the robbery.

16 comments:

Anonymous said...

Banks are regulated. Hedge funds are not. Banks don't care what the hedgies think. If you invest in a hedge fund and lose your marbles, c'est la vie mon ami.

Marcf said...

Well personally I am not in a hedge fund, I really cannot stomach the fees. I stop at "whaaaa? 2 %???" forget it!. I don't even get to the 20% of profits part. Shit I can do that leverage myself. I have flown to munis and ARS, using options for (a little bit of) leverage.

But seriously that is the kind of bile feedback that points out the problem with the hedges and the current regulatory situation: no one cares, it just caters to the "ultra-rich", so fuck em, right?.

Really, a lot of people are invested in them, trust funds, pension funds, endowments bla bla bla. And they hurt the markets right now. I read today's massive slip as more blood behind the scene from the hedgies, watch the news this week, my money is on "high profile hedgie blows up".

The hedgies DRIVE the markets by the sheer size of their leverage and investments. If August 07 was triggered by a COUPLE of funds unwinding, imagine what is going on right now with fund going belly up by the hour. The run on the hedges is just as dangerous as a traditional run on the banks.

Also without the conspiracy theory, the FED prevent the runs on banks with liquidity and now lending to banks who post illiquid/crap assets as collateral, but no one is doing this "relief" for the hedgies, no one lets them through the day, in other words they can't wait it out, like the banks do.

it is one thing if, as one commenter pointed out, the banks are effectively bankrupt right now, it is another one if the mark to market a.k.a mark to madness is forcing them, by regulation, to make those calls. Even without the conspiracy theory, it is quite convenient for the banks to go "hold em up and gimme your collateral, in the name law!"

don't you think?

And if so, then relieving the accounting pressure may relieve mark to madness and thus redemptions on the hedgies and thus the pressure in the markets. The accounting is accelerating a death spiral.

Your 401k has lost 15% in 2 month, think about it.

Andrew Meyer said...

Marc,

I'm not sure I'd use the image of the banks screwing the hedge funds, especially if you know what some of these people look like. Cornered rats seems more appropriate...

FED liquidity aside, the banks have real problems. Citi's had a $12B+ quarterly write off, Merrill's had a $10B+ write off, etc. etc. etc. And the party's just getting started.

The banks look at their write down and the fact that they will be making them every quarter for the next 3 to 5 years. That's about how long it will take to get the bad loans (CDOs - Collateralized Debt Obligations) flushed out.

The cornered banks sit with who knows how much in CDOs on their books and have no way to determine what its worth. They've just got to wait and see if someone pays. In the meantime, bosses, shareholders, the WSJ, the FT, their next door neighbors etc., all ask "What the #&$% is going on!"

The cornered rats...I mean banks will try anything they can. The Hedge funds just happen to be the closest throat to choke. Before this party's over, everyone will have the opportunity to choke and be choked. MBIA, Ambac, Moody's, S&P, the subprime lenders and many others all equally deserve choking.

The question is, which ones are going to survive? Quite a few of the banks and the monolines are fighting for their lives and you can be sure that the FBI investigations at CountryWide are not going unnoticed in the executive suites.

If one has an interest in finance or cornered rats, these really are interesting times.

Marcf said...

Thanks for an informed post. I realize the banks are squeezed, if the losses due to subprime are in the 300b range, we seem to be what 150 into it (recognize). I have no idea if that is significant for the banks or not (what is the combined capitalization) but you seem to indicate that they are becoming seriously bankrupt and need to waddle through.

I buy the theory that hedgies are just there and have no one to protect them, so screw them. If that is the case then the market swings are not fundamentals, just hedgies pressure and flushing the hedges could be just what the system needs as it looks for that cathartic "bottom" moment.

And if that is the case, this crisis is over the moment news of hedgies dying really subside. I think we are in for another wave of selling after the FED moves and then hopefully we find that point?

Wayt said...

Marcf, I agree that we'll be at the bottom when we see multiple prominent hedge funds hoisted on their own petard (leverage). Is that next month, six months, 2 years? The Fed seems to be betting (with taxpayer money) that today's gambit will avoid such a spectacle (Fed offering $200B in loans to banks, secured by the AAA-rated debt the banks can't sell right now). Call me skeptical - I'm in mostly "pure" money market funds; no ARS for me. I think today's market bounce was a dead-cat bounce.

wayt

Andrew Meyer said...

I don't think we are anywhere close enough to the bottom to be having a dead cat bounce.

Are the banks close to bankruptcy? Nobody knows. Ambiguity reigns.

Will this solve the problem? I don't know. It is a very creative solution, appropriately sized to the problem as the problem is understood.

There is also the benefit that Ben Bernanke and the FED members are incredibly well respected with very good reasons. They are much smarter than your average genius and they act with the countries best interests at heart.

Marcf said...

Wayt,

Thanks for sharing your allocation. You are the third person I know, with investments, that is pure "money market". Shit, i thought I was conservative. I am starting to feel like a loony with my 70% fixed income portfolio. It is scary, I am glued to my screen... I have looked into a bloomberg terminal but they are pricey and I don't know that i would really use it all that much. I mean I am not that much of a junkie, right? (says the junkie).

Marcf said...

Andrew,

If mortgage is 10Tr, subprime default is 7%, 700b. Of that 700b, 30% house depreciation: 210b.

So far the banks have announced "150?" so there is some to go?

some predictions are at 3-400b total? maybe double 700b? what does that do to the banks? are they kaput?

The FED has pledged 400 so far... their limit (without printing money) is at 1Tr? so in theory they can cover the holes with temp liquidity for the banks to refill the holes by ... lending more money.

it is going to take time anyway and nationalization is already underway.

Do I need to go buy Keynes theory of money?

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